Essays in Asset Pricing [electronic resource].

9781088315132

Ann Arbor : ProQuest Dissertations & Theses, 2019.

1 online resource (174 p.)

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My dissertation has three chapters. In the first chapter, I show that beliefs about covariance exhibit compression towards moderate values. First, I examine investor perceptions of the relation between electricity and natural gas across different seasons and geographies. I find that electricity futures exhibit moderate covariance with natural gas futures despite persistent heterogeneity in the fundamental relation in the spot market. A strategy that trades against this bias generates annualized excess returns of 7.2 percent which is not consistent with channels such as rational Bayesian shrinkage or rational inattention. Second, I find that professional forecasters also exhibit this bias, leading to predictable errors in macroeconomic forecasts. Finally, in an experimental setting that includes finance professionals, I find that participants overestimate the stock market's low covariance with macroeconomic variables and that perceptions of the covariance between individual stock returns and the market are compressed towards moderate values. Further, this bias appears in perceptions of autocorrelation which can help explain existing evidence of investor overreaction to past stock returns and underreaction to macroeconomic news.In the second chapter, we document the existence of long run risk in consumption growth. We take a novel approach using news coverage to capture investor concern about economic growth prospects. We provide evidence that consumption growth is highly predictable over long horizons - our measure explains up to 24 percent of cumulative future consumption growth at the 6-year horizon and beyond. Furthermore, we show a strong connection between this predictability and asset prices. Innovations to our measure price 51 standard portfolios in the cross-section and this 1-factor model outperforms many benchmark multi-factor models.In the third chapter, we find that managers significantly alter their behavior in response to non-fundamental declines in price. In particular, after an exogenous, non-fundamental price drop, managers increase their disclosure quality, and shift accrual earnings management to real earnings management. Moreover, managers with high equity incentives engage more in real earnings management, while managers at firms with high litigation risk tend to increase their disclosure quality and decrease accrual earnings management. We confirm that the net effect of earnings management, in response to non-fundamental price shocks, results in firms more frequently reporting "suspicious" earnings. In our sample, firms that experience large non-fundamental price declines are more likely, on average, to meet or beat analysts' earnings expectations by 1 or 2 cents. Additionally, we find that managers can differentiate between non-fundamental and fundamental price declines as they respond via financial reporting only to the former. Our findings suggest that non-fundamental price variation is an important driver of firm disclosure policy and earnings management.

Dissertations & Theses @ Yale University.

Books / Online / Dissertations & Theses

English

January 17, 2020

Thesis (Ph.D.)--Yale University, 2019.

Yale University. Management.